The definition and measurement of alpha are different issues from what is often “sold” by zealous funds managers. And the progress is on the definition and measurement side rather than on getting funds managers to sell their wares in a more sober and transparent fashion. Alpha is added value.

The advances in thinking of the last couple of years have come about through the realisation that standard market benchmarks do not represent a fair line in the sand to measure the ‘added’ component. A better benchmark to assess alpha strategies is the appropriate ‘beta prime’ or what some people call ‘hedge fund beta’.

This is the underlying driver of a strategy which can readily by replicated through a quant model. ‘Activist’ strategies, which are increasingly popular in the US but not yet available in Australia, should similarly be judged not against a standard S&P 500 or Dow Jones Index but rather against an event-driven index.

An event-driven index would involve a model whereby all stocks which announce a takeover (the acquirers) are immediately sold and all targets immediately purchased. This simple strategy adds 1-2 per cent over the Dow even though it does not reflect any skill above the ability to make and implement the model.

Gordon says that investors should be cautious about some new forms of investments too, such as agribusiness funds and carbon trading funds, which may seem to make intuitive sense and could certainly be seen to ride a global fashion trend. “Agribusiness is not an investment, it’s speculation,” Gordon says. “It’s speculation because there’s no risk premium. There’s no risk premium because it’s just about prices moving from A to B. Carbon trading would be the same.”

He observes, however, that the early adopters of various new strategies have been well rewarded in the past. Those investors who are belatedly following the Yale model (investing in an array of lowly correlated alternatives) may be facing all sorts of risks.

But the biggest immediate issue facing investors around the world is the unwinding of leverage. “De-leveraging is not a six-month thing,” Gordon says. “If you look back to 1987 when the whole boom was built on leverage, it took several years for the market to recover. [In the recent run-up] banks became sales organisations, not credit organisations. That will change.”